Govt Borrowing

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How much can governments

borrow? Financialization and
emerging markets government
borrowing capacity
a
Iain Hardie
a
Politics and International Relations , University of
Edinburgh , UK
Published online: 13 Jun 2011.
To cite this article: Iain Hardie (2011) How much can governments borrow?
Financialization and emerging markets government borrowing capacity, Review of
International Political Economy, 18:2, 141-167, DOI: 10.1080/09692290903507276
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INTERNATIONAL FINANCE AND TAX

How much can governments borrow?
Financialization and emerging markets
government borrowing capacity
Iain Hardie
Politics and International Relations, University of Edinburgh, UK
ABSTRACT
This article considers the varied borrowing capacity of emerging market
governments, a key component of the impact on governments of financial
globalization. It focuses on the link between the financialization – defined
here as the ability to trade risk – and borrowing capacity, analyzing three
case study countries: Brazil, Lebanon and Turkey. Both domestic and inter-
national bond markets are considered and differences in the ownership of
government bonds in the three countries are highlighted. The financializa-
tion of different financial market actors is analyzed, concentrating on two of
the most important, domestic commercial banks and individual investors,
and the financialization of the structure of each market. It is argued that
the greater the financialization, the greater the ability to exit or short. This
increases the cost of borrowing and increases the likelihood, and severity, of
crisis, thereby reducing government borrowing capacity. Comparative event
studies from the three countries demonstrate the influence of financialization
in crisis, or potential crisis, situations.
KEYWORDS
Bond markets; financialization; government borrowing; Brazil; Lebanon;
Turkey; financial crisis.
INTRODUCTION
How much can governments borrow from private markets? This question
goes to the heart of the debate regarding the impact of financial globaliza-
tion on government policy (see Cohen, 1996; Ocapmo and Stiglitz, 2008).
Government debt ‘provides a most likely location for the operation of finan-
cial market pressures’ (Mosley, 2003: 17; emphasis in original). Investors
reward or punish governments for policy decisions directly through the
Review of International Political Economy
ISSN 0969-2290 print/ISSN 1466-4526 online C 2011 Taylor & Francis
http://www.informaworld.com
DOI: 10.1080/09692290903507276
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
cost and availability of financing. The more a government can borrow, the
greater its immediate ability to carry out its chosen policies. Borrowing ca-
pacity has been seen as crucial to the outcome of both World War I (Frieden,
2006: 131) and the Cold War (Ferguson, 2001: 406). Even in less confronta-
tional times, government debt is not only a transfer of resources between
generations but potentially between successive governments. ‘Eventually
the debt would have to be repaid. For a politician, however, eventually is
a long time, certainly farther in the future than the next election’ (Frieden,
2006: 381; also Allen and Gale, 1994; Geddes, 1994).
Despite the temptation for politicians in borrowing, the levels of gov-
ernment debt vary markedly. In the 31 middle income ‘emerging market’
countries in the ‘EMBI Global’, an index of emerging market bonds, the

ratio of government international debt to gross domestic product (GDP)
in 2006 ranges from Lebanon’s 85.7 per cent to China’s 1.5 per cent of GDP
(IMF, 2006f: 34). For domestic debt, the 23 countries in the ‘EMLI+’ (a
local currency debt index) ranges from Singapore’s 102.7 per cent1 (IMF,
2006d: 26) to Hong Kong’s 1.0 per cent (IMF, 2006e: 23). While very low
levels of debt are the result only of government decisions, at higher levels,
it is a question of how much lenders will finance (Frieden 1991; Reinhart
et al., 2003). Private lenders (for governments, overwhelmingly bond mar-
ket investors) will obviously lend only when they believe the debt will
be repaid. Their concern is debt sustainability. Sustainability is, however,
difficult to analyse precisely (IMF, 2002). The interest rate paid is a key
component on any calculation, and debt sustainability is therefore most
questioned at times of rapidly rising interest rates. For many emerging
market countries, the possibility of such ‘debt crises’ – culminating in mar-
kets no longer financing governments – is a constant concern, particularly
for ‘debt intolerant’ countries, with a history of default and high inflation,
where crises can occur at relatively low levels of indebtedness (Reinhart
et al., 2003).
The international financial institutions have well-established views on
minimizing the risk of such crises: increase demand for government bonds
and maximize the stability of that demand by attracting investors with
the broadest range of opinions (IMF, 2003). This reduces yields, and, by
increasing the likelihood of sellers and buyers meeting, reduces volatil-
ity. Government bond markets should therefore be as liquid as possible.
Investors should be able to follow the broadest range of investment strate-
gies, including short selling, and be able to reverse those strategies easily.
In brief, governments should increase the ability of investors to trade risk.
This article examines these views and resultant policy recommenda-
tions. Does increasing the ability of investors to trade in emerging govern-
ment bond markets – defined here as increasing financialization – enhance
or diminish the ability of governments to borrow? It concludes that the
more (less) financialized an emerging government bond market, the lower
142
HARDIE: EMERGING MARKETS GOVERNMENT BORROWING CAPACITY
(higher) the capacity of governments to borrow on a sustainable basis. In

emerging markets, financialized markets are debt intolerant markets. The
article examines two issues: the varied levels of debt-to-GDP that different
emerging market governments have sustained, and the way bond markets
have reacted to situations that precipitated, or could have precipitated, a
‘debt crisis’.
FINANCIALIZATION
Financialization, it is argued here, undermines sustainable borrowing by
increasing the cost of that borrowing (on financial liberalization increasing
Turkish interest rates, see Aricanli and Rodrik, 1990) and making financial
crises more likely and more severe. This article can therefore be seen as
sharing the post-Keynesian view of financial liberalization as resulting in
increased volatility (see Grabel, 1995; on Brazilian liberalization of capital
outflows, de Paula, 2008; Gottschalk and Sodré, 2008), and an increased
likelihood of crisis. By utilizing financialization as the independent vari-
able, however, the article moves beyond considering only liberalization.
Financialization is defined here as the ability to trade risk; both taking
and trading the risk on the performance of an asset. Securities markets are
designed to allow the buying and selling of various types of risk, but the
ability to do so – the liquidity of individual markets (e.g. Carruthers and
Stinchcombe, 1990) – varies considerably. Furthermore, the ability of an
individual investor to trade risk in a particular market is a function not
only of the financialization of the government bond market structure (i.e.
the constraints on the trading of risk in the particular market), but also of
the financialization of the investor (i.e. his/her own ability to trade risk).
Individuals’ ability to trade risk, for example, is constrained even in the
most liquid market. Furthermore, as demonstrated below, the financializa-
tion of the investors that dominate a particular market will interact with
the financialization of the formal market structure to determine the ability
of all investors to trade risk in that market. The ability to trade risk is low
in a market that consists of a single financial product and where the ma-
jority of the outstanding securities are owned by banks and pension funds
that hold those securities until they are repaid. In contrast, financialization
is high in a market with a broad range of financial products and with
the heavy involvement of short-term trading-orientated investors aiming
to buy and sell frequently. More (less) financialized investors are likely
to increase (decrease) the financialization of market structure and more
financialized markets attract more financialized investors, but structure
and actors can usefully be considered separately.
The importance of the ability of investors to trade risk (focused on ease
of exit for international investors) has been highlighted previously (e.g.
Maxfield, 1997: 7), as has the distinction between ‘patient’ and ‘impatient’
143
capital (Cohen, 1996: 284; Kahler, 1998: 10; Sobel, 1999: 22; Bryant, 2003: 43).
Maxfield (1998) considers the relative patience of different international in-
vestor types. This study develops Maxfield’s approach: first, by focusing on
differences in the actual ownership of government bonds, demonstrating
both the variety in ownership patterns and the role of domestic investors,
even in international bonds. Second, the study highlights differences be-
tween investors of the same type, focusing on domestic commercial banks
and individual investors. Third, a focus on the ability to trade risk, rather
than solely on exit, highlights the importance of short selling.
Financialization is rarely used in international political economy (IPE)
(although see Epstein, 2005a). The financialization literature itself lacks an
agreed definition. Ertürk et al. (2008) highlight four broad approaches (also
Epstein, 2005b: 3; Krippner, 2005: 181; French et al., 2008). A wide range of
topics are now discussed within this literature (see Engelen, 2008), but the
focus has been almost exclusively on the developed economies. Compar-
ative studies outside Europe and North America are especially lacking.
The ability to trade risk is a narrower definition, but one that encom-
passes the central processes of ‘[t]echnological change, regulatory change,
and institutional change’ (Rajan, 2005: 331)2 in financial markets in both
developed and emerging market countries. Such changes all concern the
increasing ability of financial market actors to take and trade risk (on the
US, see Crotty, 2008). This article also highlights change amongst, and
differences between, domestic banks. Aglietta and Breton (2001: 441) rec-
ognize changes as banks add a ‘new market portfolio’ to their ‘traditional
credit portfolio’ (see also Ertürk and Solari, 2007; Froud et al., 2007). Again,
at the heart of such changes is the increasing ability to trade risk.
CASE STUDY COUNTRIES

The article considers three case study countries: Brazil, Lebanon and
Turkey. They are selected from those emerging market countries with
government debt that is high enough to cause possible market debt con-
straints. A ‘most different’ selection approach is used. The countries are
very different across a range of variables, including most importantly the
independent variable in the study, the ability to trade risk in their govern-
ment bond markets. A comparison of the countries is shown in Table 1.
Brazil ranks amongst the world’s 10 largest economies, has a relatively
sophisticated financial system (Gleizer, 1995: 223; Carvalho and Garcia,
2006), and was, in February 2004, the largest component (i.e. has the largest
volume of liquid bonds outstanding) of the EMBI Global index. Lebanon
has in recent history endured a full range of misfortunes. For many inter-
national investors, a cursory look at investing in its bonds shows yields
that are far too low relative to similarly creditworthy countries. ‘[R]atings
lower than [Lebanon at the time of the research] are usually reserved for
144
Table 1 General comparison between the countries (end 2006 unless stated)
Brazil Lebanon Turkey

GDP (US$ Billion) 1089 22 530
Population (million) 118 4 72
GDP per capita (US$) 5788 5438 7351
Rating (S&P) BB+ B- BB-
Government domestic debt to GDP (%) 58.0 85.7 43.7
Government international debt to GDP (%) 6.2 88.9 16.2
EMBI weighting 2004 (%) 19.01 1.12 6.22
Size of domestic bond market (US$ billion eq.) 528 20 178
Average assets of 10 largest banks (US$ Bn) 57.5 25.1 5.4 (2004)
Bank Assets to GDP (%) 68 331 86
Sources: http://data.worldbank.org, www.standardandpoors.com, www.bcb.gov.br, IMF

(2006g: 9), www.treasury.gov.tr, www.turkstat.gov.tr, JP Morgan (2004), www.finance.gov.lb,
Undersecretariat of Treasury (2007), www.tbb.org.tr, Baz (2005: 444), www.bdl.gov.lb, IMF
(2007a: 12).
countries that are already in default’ (Moody’s analyst, Habib 2007). The fi-
nancialization of Turkey’s financial market structure and market actors lies
between Brazil and Lebanon, as Turkey does on many variables. Turkey
is the fourth largest EMBI constituent. Both Brazil and Turkey have the
extensive history of default and inflation that is seen as making them able
to safely sustain only a low level of external debt (Reinhart et al., 2003).
Lebanon has suffered periods of high inflation. Aside from their position as
potential emerging market bond investment destinations, these are three
very different countries.
We would reasonably expect that the higher a country’s credit rating and
the more sophisticated its financial markets, the more a government would
be able to borrow. However, in the case study countries, the opposite is the
case. Net public sector debt-to-GDP from 1996–2006 in the three countries
is set out in Figure 1.
There is also a marked difference in the levels of government in-
debtedness that have resulted in a debt crisis. Most formal analyses of
government debt crisis have defined crisis as default (e.g. Reinhart and
Rogoff, 2009). However, situations where governments have been unable
to borrow from private market actors, and have been forced to turn to
the International Monetary Fund (IMF) are also crises (with or without
simultaneous currency and/or banking crises), and are important to
understanding government borrowing capacity. In the run up to the
2002 presidential elections (the peak in Brazil’s debt levels above), Brazil
was considered to be in a ‘death spiral’ (Krugman, 2002: 2), and the
Financial Times (15 October 2002) concluded: ‘At current market rates,
even an optimist would admit Brazil is insolvent’. The economist Barry
Eichengreen forecast default (Santiso, 2004: 23), which an IMF programme
145
180
160
140
120
Net Public Debt to GDP (%)
100
Brazil
Lebanon
Turkey
80
60
40
20
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Figure 1 Net public debt to GDP 1996–2006. Source: IMF reports. Source:
www.bdl.gov.lb, http://data.worldbank.org, IMF (2000a, 2000b, 2002b, 2005,
2007b, 2009).
possibly pre-empted. Turkey’s peak, in the 2001 financial crisis, also

necessitated an IMF programme and an exceptional 6.5 per cent of GDP
primary surplus, but only after far higher government debt levels were
reached. The contrast with Lebanon is even more dramatic: ‘For years
now, Lebanon has been able to sustain a government debt-to-GDP ratio
which is well beyond levels deemed sustainable’ (IMF, 2006a: 28).
This higher level of sustainable debt is closely linked to relatively low
and stable bond yields. Figure 2 below shows the US dollar yields of the
three case study countries’ EMBI components since 1998.
The greater volatility of Brazilian bonds and the lower volatility of
Lebanese bonds are clear, as is the extended periods of higher Brazilian
and lower Lebanese yields. The highest rated country, with the lowest level
of government indebtedness and the most financialized markets, has seen
both generally higher yields and the most dramatic spikes in borrowing
costs.
ANALYSING FINANCIALIZATION
Financialization, as defined here, could be measured by the volumes of
trading in government bonds, on the assumption that there will be more
trading in markets where that trading is easier. The data certainly con-
firm the differences between the markets, both in the absolute volume of
trading and in turnover relative to each market’s size. In 2007, Brazilian
146
Case Study EMBI Yields
30
25
20
Yield (s.a.)
Lebanon
15 Turkey
Brazil
10
5
0
30/04/1998
30/08/1998
30/12/1998
30/04/1999
30/08/1999
30/12/1999
30/04/2000
30/08/2000
30/12/2000
30/04/2001
30/08/2001
30/12/2001
30/04/2002
30/08/2002
30/12/2002
30/04/2003
30/08/2003
30/12/2003
30/04/2004
30/08/2004
30/12/2004
30/04/2005
30/08/2005
30/12/2005
30/04/2006
30/08/2006
30/12/2006
30/04/2007
30/08/2007
Date
Figure 2 EMBI country components US$ yields 1998–2007. Source: Bloomberg.
domestic bonds were the second most actively traded in the emerging
markets (Emerging Market Trade Association (EMTA) 20073 ). Brazilian in-
ternational bonds were the most actively traded. Turkey’s domestic bond
market was the fourth most actively traded by volume in 2007. The inter-
national bonds were the sixth most active. Total trading volumes in the
survey for Lebanon were only US$7724 million for international bonds
and US$806 million for domestic bonds. Data for individual bonds con-
firm these differences. The most actively traded international bond, ‘the
industry’s benchmark’ and ‘everybody’s favourite short’4 was a Brazil-
ian US$-denominated bond maturing in 2040, with a trading volume 93
times its issue size. Four Brazilian bonds appear in the top 10 most ac-
tively traded. Turkey’s most traded international bond was the third most
actively traded, a volume 42 times its issue size, while the most actively
traded Lebanese international bond had a trading volume only just over a
quarter its issue size.
Such data support the claim of differential financialization across gov-
ernment bond markets, but does not explain those differences. In partic-
ular, it obscures the detail of the workings of individual markets, and the
processes of change. This risks an overemphasis on financial liberalization
at the expense of other important reasons for change. Regulation is not
the only influence on investor decision making, even in heavily regulated
areas. In Brazil, for example, banks’ voluntary holdings of government
bonds are three times their holdings required by regulation.5 Furthermore,
change brought about by technological advances, financial innovation and
changing business practices can be independent of regulatory change and
147
may undermine regulation. Financial innovation undermined Brazilian

capital controls (Carvalho and Garcia, 2006), for example. ‘[I]mproving
the technical efficiency of markets may actually be a contributory factor to
the frequency of currency crises in the 1990s’ (Krugman, 1997), and before
2008 ‘many problems were hidden in the “plumbing” of the financial mar-
kets” (Reinhart and Rogoff, 2009: 221), so a greater focus on this plumbing
is needed.
Internationalization (increased foreign ownership of bond and equity
markets or banks) also represents important change, but unless changes
in domestic financial markets always result from the adoption of inter-
national practices, a focus on internationalization risks missing changes
in domestic actors and markets. In Brazil, domestic private banks had

a competitive advantage over foreign banks in treasury operations and
technology (Stallings, 2006: 245), and both Brazil and Lebanon have seen
recent periods of declining foreign ownership of banks. A lack of attention
on domestic markets and financial market actors is a weakness in IPE’s
consideration of financial markets (Sobel, 1999: 206), and in the analysis of
government debt generally (Reinhart and Rogoff, 2009). Financialization,
as defined here, considers internationalization, liberalization and other
changes in financial systems, and considers domestic and international
markets together.
This article considers first which investors own government bonds in the
three countries. There are significant limitations in the available statistics,
so quantitative data are supplemented by interview data.6 The influences
on the two central groups of investors, domestic commercial banks and
individuals, are then analysed, focusing both on the investors themselves
and the market structure in which they operate. A comparative event
study then considers crucial periods of financial crisis, or potential crisis,
to demonstrate how investor behaviour has influenced the outcome of
such events. Last, the conclusion considers both the generalizability of
the findings and the implications for government policy towards, and
academic study of, financial markets.
WHO OWNS GOVERNMENT BONDS?

Table 2 shows ownership by investor type in the domestic government
bond markets (excluding ownership by government entities, including
central banks) at end-2006. Table 3 covers the international markets.
Domestic bonds are those bonds issued in the respective home countries
and governed by domestic law. Most such bonds are denominated in the
domestic currency. International bonds are issued outside the country of
the borrower, are governed by the laws of another country than the is-
suer and are nearly all denominated in currencies other than the issuing
country’s own.
148
Table 2 Investor involvement in domestic bond markets
Lebanon Turkey Brazil

Domestic Very high High involvement. High involvement.
commercial involvement. Own 37.3%7 Own 43.2%
banks Own 79.4%
Domestic Involved. Involved. Own Not involved. Own
individuals Probably own approximately 0.16%
20%8 25%9
Domestic mutual Not involved Low involvement. High involvement.
funds Mutual and Including pension
pension funds and hedge funds,
own 5.7%10 own 50.0%
Domestic pension Not involved Low involvement High involvement

funds
Domestic hedge Not involved Not involved High involvement
funds
International Not involved Involved. Own Low involvement.
investors 18.4% Own about 2%11
In Lebanon, over three-quarters of domestic and international govern-

ment bonds are owned by domestic commercial banks. Domestic indi-
vidual investors own much of the remainder, with domestic and interna-
tional institutional investors barely involved. In Turkey, domestic banks
and individuals own over half the domestic government bonds and over
Table 3 Investor involvement in international bond markets
Lebanon Turkey Brazil

Domestic Very high High involvement. Involved. Uncertain,
commercial involvement. Own 34.4% but probably own
banks Own 77.2% less than 20%
Domestic Involved. Involved. Own Not involved
individuals Probably own 6.8%13
10–20%12
Domestic mutual Not involved Low involvement. Low involvement.
funds All domestic Some foreign
institutional currency
investors own denominated
2.6% mutual funds
Domestic pension Not involved Low involvement Not involved
funds
Domestic hedge Not involved Not involved Low involvement
funds
International Not involved High involvement. High involvement.
investors Own over 50% Probably own
60–75%
149
40 per cent of international bonds. Domestic mutual and pension funds

are not yet significant investors. There are no domestic Turkish hedge
funds. International investors are significant in both domestic and in-
ternational markets, owning just less than 20 and over 50 per cent re-
spectively. The Brazilian domestic market has a broad range of financial
market actors. Banks and domestic institutional investors, including mu-
tual, pension and hedge funds are all active, with domestic individuals’
and international involvement low. Estimates of domestic ownership of
Brazilian international bond markets ranged from 25 to 40 per cent, but
there was considerable uncertainty, even amongst Ministry of Finance
officials.14
DOMESTIC BANKS AND INDIVIDUAL INVESTORS

Domestic banks, and to a lesser extent individual investors, are central to
the ability of emerging market governments to borrow. The next section
will consider the influences on these investors. Market structure will be
discussed, but also the constraints on the ability to trade risk that result
from the nature of investors. First, the ability to exit is considered, including
both situations when exit is effectively impossible, and when constraints
on exit (including exit via hedging) fall within the more conventional
analysis of transaction costs. Shorting is considered next. The focus on the
ability to trade risk highlights that it is not only the ability to exit, but also
the ability to short, that are important to borrowing capacity. Shorting –
selling securities one does not already own – is not exit, as the investor
maintains an interest in the price of the security, but is also not the same as
remaining invested. Finally, the question of investor capacity if considered,
as investor behaviour is obviously only important if those investors have
the capacity to influence markets. The question of capacity, however, is not
only concerned with the size of investors, but with how their performance
is measured. The way in which the investment behaviour of banks and
individuals has been important in crisis and potential crisis situations
is then examined by way of a comparative event study, examining the
actions of domestic commercial banks and individual investors in the
three countries at specific periods.
Market structure
This analysis begins with the structure of the markets, and its influence on
‘liquidity’. A complete analysis of all factors that influence the structure
of markets, or of all the risks that banks face, is beyond the scope of
this article, but examples that indicate significant differences between the
three countries are chosen. The Brazilian Mercantile and Futures Exchange
(BM&F) is central to the high financialization of the Brazilian market.
150
The exchange trades futures and options, including on interest rates and
currencies, and is ‘ten times more liquid maybe’ than the government bond
market,15 ‘so everybody that wants to take a sizeable position goes to the
futures market’.16 This represents ‘the biggest difference you have from
other emerging economies’.17 Without the derivatives market, aggressive
short-term trading on Brazilian interest rates could not take place in such
volumes; nor could risk be efficiently hedged. One of the largest private
banks completes about 90 per cent of its hedging through the BM&F,18
and this ability to hedge exposure allows exit without selling bonds. In
Turkey, with a less developed derivatives market, its further development
would, for one bank, ‘fundamentally change the way I’m running my
portfolio’.19
The BM&F is a private sector initiative. However, private sector ac-
tors can also inhibit the financialization of the market structure. Lebanese
banks have a ‘tacit agreement’ not to lend government bonds,20 despite
lending being in itself profitable. This agreement limits the financial-
ization of the government securities market, by preventing short sellers
from borrowing bonds (see Committee on the Global Financial System,
2007: 54). A Lebanese banker is explicit regarding the motivation for the
agreement:
’When I get calls from [an American bank], looking for a trade to
short Lebanese pounds I will do everything I can, not only not to
facilitate it but to make sure he doesn’t do it with anybody else as
well. I’m not in it for short term profit, I’m in it for going with the
grain’.21
Lebanese and Turkish banks gain little from facilitating such financial-
ization, as it pushes down the price of the bonds they hold, and they cannot
exploit it: ‘it wasn’t very interesting for us to create some more volatility
on this market’.22
Limited bond lending not only limits overall trading activity, it also
makes the development of a credit derivatives market more difficult (see
below). Credit derivatives (most commonly, credit default swaps (CDS))
are ‘financial contracts that allow the transfer of credit risk from one market
participant to another’ (Bomfim, 2005: 4). Effectively, a buyer of a CDS is
buying tradable insurance against default. CDS increase financialization,
in part by facilitating shorting.
The financialization of the market structure, important as it is, must also
be combined with the financialization of investors. It is the financializa-
tion of domestic banks and individual investors that is considered next,
focusing on the ability to exit.
151
Ability to exit
The ability to exit is central to the analysis of a broad range of issues
in political economy. In the study of financial markets, however, there is
rarely any consideration of an absolute inability to exit, and even then
only as the result of legislation. Here, however, in the specific case of the
domestic banks, the analysis goes beyond the costs of exit, to consider
the situation where ‘full exit is impossible’ (Hirschman, 1970: 100). This
unusual situation can lead to ‘loyalty’. As will be shown below, this loyalty
does not have to be ‘enforced’ by regulation (Cohen, 1998: 132), and varies
across the three countries.
Banks’ inability to exit can result from their large holdings of govern-
ment securities, relative both to the size of the market and to their total
assets, and from their inability to exit, short of closing completely, their
domestic business generally. The size of bank holdings severely limits
their ability to exit. In Turkey, the large banks cannot sell more than about
US$300 million equivalent in a day, with one concluding they could not
sell their portfolio in a year.23 Similarly, Lebanese banks wanting to sell
are faced with everyone also trying to sell, and maintain their holdings for
fear of pushing down prices.24 A US$20 million trade in Lebanese interna-
tional bonds could move the market 1–2 per cent in price. In a period of
great uncertainty, such as after the assassination of former Prime Minister
Rafik Hariri (see below), US$5 million would be sufficient. In the domestic
bonds, LBP20 billion (US$13.3 million) is a large trade.25 This practical
impossibility of exit goes beyond transaction costs. As far as larger banks
are concerned, they cannot sell.
In addition, a high percentage of the banks’ total assets are government
bonds: in Brazil 27, in Turkey 51 and in Lebanon 54 per cent. The major-
ity of Lebanese interviewees believed a default by the government would
lead to the collapse of the banking system. ‘If the government defaults, we
default’.26 Even if banks decide to limit their risk on the government by
buying fewer bonds, their exposure to the Lebanese banking system and
the economy is effectively the same risk.27 This is a risk that the market
structure prevents them even partially hedging. Turkish interviewees dis-
agreed on whether a government default would lead to the insolvency of
their bank, but some consider that diversifying to private sector lending
offers no protection.28 The size of the banks’ holdings, and their exposure
to the bond market and the economy more generally, has a significant (but
across the three countries varied) influence on their investment decisions.
Specific examples of bank behaviour are discussed below, but the attitude
of the Lebanese banks is particularly noteworthy: ‘at least I have to keep
. . . what I already have with the government . . . and if the government
. . . needs some money, I have to give it’.29 Brazilian banks own a smaller
proportion of the market, and, as discussed above, the more financialized
152
market structure gives more hedging and trading options. They still face
the difficulty of their entire business being exposed to the economic cost
of a government default, but the ability to exit is higher.
When the option to exit exists, the costs of exit have a significant impact.
For emerging market investors, the costs of that exit are high. Transaction
costs are particularly onerous for individuals but also for smaller insti-
tutions. Larger institutions, with greater sums to invest, can better meet
these costs, many of which are fixed and substantial.30 Banks in emerging
market countries are relatively small, and the three case study countries
show considerable variation (see Table 1 above). The result is a varied
capacity to meet the costs of trading risks other than government bonds.
The range of alternative investments has an important influence on the

costs of exit. The narrower these alternatives (the lower the investor’s abil-
ity to trade risk) and the lower their return, the more costly exit may prove.
The usual alternative to government bonds for banks in an emerging mar-
ket is lending, other government bonds or inter-bank deposits. On US dol-
lar deposits (allowed in both Lebanon and Turkey), banks frequently pay
interest higher than either US government bonds or bank deposits with
international banks. They cannot profitably expand their balance sheets
on that basis. The yields on US dollar bonds issued by the Lebanese and
Turkish governments, however, generally yield higher than deposit rates.
For individual investors, the main alternative to government bonds is this
lower interest on bank deposits. International investors, in contrast, can
trade a broader range of risks, and compare an emerging market govern-
ment’s debt to the (possibly higher yielding) debt of other governments.
How those returns are measured also has an influence. On one level,
this is the different timeframe for investment highlighted by the distinc-
tion between patient and impatient capital. In this framework, banks and
individuals are usually seen as buyers of short term assets. Short maturity
borrowing is seen as undermining debt sustainability, because of the need
to refinance. Individuals in the three countries, however, not only expect to
hold bonds until maturity 31 (although see Stallings, 2006: 126; Borensztein
et al., 2006: 8 on Latin America), but are also likely to reinvest.32 Lebanese
and Turkish banks are in a similar position, and also buy longer dated
bonds, especially in foreign currencies.
The detail of how performance is measured is also important, how-
ever. For banks, International Accounting Standard 39 (see Deloitte Touche
Tohmatsu, 2006) gives three ways to account for government bond hold-
ings: as trading, ‘available for sale’, or investment. In the investment book,
profit is calculated on an accruals basis. A bond bought with a yield of
10 per cent per annum will show an income of that yield until the bond
is repaid, regardless of market movements (absent, of course, substantial
credit deterioration). The important point here is that bonds cannot be
sold from the investment book (except usually for five per cent of the total
153
investment book holding per annum) without the entire investment book
being revalued at prevailing market rates. In a weak market, this limits the
ability to trade risk. Interviewees indicated they would only sell from the
investment account in the most extreme circumstances. The investment
book is ‘a small accounting thing but it changes everything in the way
of running business and it changes incentives to buy and sell at specific
times’.33 Bank investors, within their investment portfolio, are long term
‘buy and hold’ investors. The international investors interviewed are gen-
erally taking views for a maximum of three to six months, with some even
more short term.34 In contrast, in the investment book: ‘my 30 year bonds
will never come back within the next 30 years’.35 Banks, generally seen
as buyers of short-term government securities, are buying bonds up to 30

years in maturity on a ‘buy and hold’ basis.
Ability to short
Consideration solely of the ability to exit is insufficient in modern finan-
cial markets. Many investors can now short. Both legislation and market
structure will influence the ability to ‘go short’, but a major influence is
also the investment mandates and decisions of investors. The focus here is
on banks (individuals in the three countries had few possibilities to take
short positions).
Banks can introduce proprietary trading operations, in addition to more
traditional treasury functions. A focus on capital gains then becomes more
likely. As far as Lebanese and large Turkish banks are concerned, the
treasury function still dominates.36 For smaller Turkish banks, and most
importantly for the Brazilian banks, trading is relatively more significant.
Brazilian private banks accounted for over two-thirds of their holdings of
government bonds as ‘trading’ in December 2005. The equivalent Turkish
figure is 13.7 per cent.37 International interviewees also note this Brazilian
focus on trading.38
If Lebanese or Turkish banks tried to short securities in large size, other
banks would know, 39 and could exploit the situation, for example by
‘squeezing’ the price of the shorted security higher.40 This is a result of
both the large holdings of government bonds by these banks and the mar-
ket structure. The situation for banks in both countries is similar, despite
only Lebanese banks facing a regulatory prohibition on shorting. Thanks
largely to the BM&F, Brazilian banks can short, and proprietary traders at
the larger Brazilian private banks, trading solely to make profits on their
own books, will do so.41 These proprietary trading desks act in a very
similar way to hedge funds. In contrast, at a Turkish bank with a pro-
prietary trading desk, the limits on trading are kept low, because traders
might work against the interests of the larger bank portfolio of government
bonds.42 As one Turkish banker observed, ‘I can’t act like a hedge fund’.43
154
Investor capacity
Investors are only important if they have sufficient capacity to influence
markets. This capacity is also important to Hirschman’s conception of
loyalty, because, to remain invested when market prices are in danger
of falling, loyal investors must believe that their remaining will make a
difference to prices; they must be ‘quality makers’ (Hirschman, 1970: 99).
Capacity is partly a question of the amounts investors can invest, relative
to the government’s need for financing. Bank assets to GDP are far higher
in Lebanon than Turkey, which is in turn higher than Brazil (see Table 1).
This, in itself, has a significant impact on government borrowing capacity.
However, the willingness of investors to buy government bonds, espe-
cially in periods of market weakness, is also influenced by performance

measurement or accounting issues, especially the ability to avoid mark-
ing to market. For individual investors, such performance measurement
issues do not exist. They buy and hold government bonds as they would
make a time deposit. They can therefore be significant buyers when other
investors stay on the sidelines (see below), and not sell when others exit.
Banks can act similarly, because of the investment book. First, existing
holdings can be moved into the investment book to avoid actual or poten-
tial losses: ‘the losing position[s] generally find their way in[to] investment
portfolios’.44 Bonds can also be purchased during severe market weak-
ness (see Allen and Gale, 2000: 271). Some banks in Lebanon and Turkey
bought bonds in periods of serious market stress because the investment
account meant they did not face losses if prices fell further. For one bank,
all the bonds in the investment account, 14 per cent of the portfolio, had
been purchased at such times.45 The investment book is heavily used by
government-owned banks in Brazil and Turkey, but even for domestic pri-
vate banks, it represented 7.2 and 16.5 per cent of securities holdings at the
end of 2005 respectively.46
For banks, financialization also includes the ability to borrow to finance
assets, so removing constraints on risk-taking from the availability of
customer deposits. Financing comes mainly from inter-bank borrowing
or through the repurchase (‘repo’) market. This short-term financing of
longer-term assets results in a high vulnerability to market movements,
the opposite of the situation with the investment book. In extreme situ-
ations, banks are similar to hedge funds. This vulnerability was exposed
amongst the smaller Turkish banks in 2000 (Alper, 2001).
DOMESTIC BANKS AND INDIVIDUAL INVESTORS IN CRISIS

SITUATIONS
How then have banks and individuals behaved in practice? To consider
this, the next section undertakes a comparative event study, comparing
155
the reactions of markets in the three countries to situations where shocks

could have led, or did lead, to financial crisis. The focus is on the 2005
assassination of former prime minister Rafik Hariri in Lebanon, the 2001
financial crisis in Turkey, the 1998–99 crisis in Brazil, the result of contagion
from a Russian default that should have had a similar impact on all three
countries (if not a greater impact on geographically proximate countries),
and the 2002 crisis induced by market fears about the presidential victory
of the left wing Lula da Silva. All these time periods are covered in Figure 2
above, and the striking weakness of Brazil in both relevant periods, and the
lower yields at which Turkish, and particularly Lebanese, bonds peaked
are immediately apparent. In each event, the range of possible outcomes,
including an IMF programme or, in Lebanon’s case, bilateral support,

are similar. All three countries are vulnerable to shocks, both internal and
external, leading to financial crisis, and such shocks should have a negative
impact on bond market yields. However, it would be reasonable to expect
that the higher-rated and less indebted a country, the less likely it would
be to face crisis, and the more diverse the investor base in a market, the less
severe that crisis would be. The experiences of the three countries question
those assumptions. While the diverse nature of the ‘triggers’ for actual or
potential crisis present some difficulties for comparison, contagion from
the Russian default should be a concern for all three countries. Further-
more, the peaceful transition to a left-wing president in Brazil should have
a lesser impact than the murder of Lebanon’s most high profile politician
and the resultant political crisis. Additional support is also provided by
events not analysed in detail here, but discussed more briefly below.
Hariri’s assassination
Rafik Hariri, former prime minister and opponent of Syria’s presence in
Lebanon, was assassinated in February 2005. Reacting to enormous po-
litical uncertainty, local bank depositors switched US$5.5 billion from
Lebanese pounds to US dollars; Lebanese pound resident deposits de-
clined by 33.2 per cent by the end of March. Simultaneously, US$2 billion
left the country (IMF, 2006b: 6.); total non-resident deposits fell by 11.7
per cent.47 This threatened the main anchor of the Lebanese government’s
economic policy, the effective fixing since 1993 of the pound to the US
dollar.
The banks reacted in three important ways that assisted the central
bank’s crisis management. They did not exit, as might be expected. Reg-
ulation prevents Lebanese banks from running any significant currency
mismatch. Therefore, they reacted to the changes in their deposits by sell-
ing Lebanese pound securities to Banque du Liban, and exchanged the
pounds received for US dollars, again with the central bank, the only
buyer supporting the Lebanese currency. This depleted the central bank’s
156
foreign currency reserves. The risk-averse strategy, of placing the US dol-

lars outside the country, was available in a country without capital controls.
However, the US dollars were instead placed on deposit with the Banque
du Liban. ‘[I]f we had really done what theoretically . . . a risk averse per-
son would have done, definitely [the currency] would have collapsed’.
The decision to keep the deposits with the Banque du Liban was the result
of ‘persuasion’.48 Central bank foreign currency reserves, lost supporting
the currency, were replenished as banks deposited their US dollars. Gross
reserves fell, but were maintained at close to US$8 billion (IMF, 2006b: 7).
Meanwhile, the central bank’s net foreign exchange liquidity49 fell close
to zero. The banks also accepted swaps to lengthen the maturities of gov-
ernment and central bank debt (IMF, 2006b: 6), when in similar situations
(for example, Brazil in 2002) investors would be expected to reduce the
maturities of their exposure. Overall, there was ‘tight [Banque du Liban]
– banks cooperation’ (Bank Audi, 2005a: 2). The exposure of the banks to
the government (including Banque du Liban) increased in the first quar-
ter of 2005, and the government continued financing (Bank Audi, 2005b).
The spreads of international government bonds actually fell over the same
period (Bank Audi, 2005a: 10).
Second, the banks encouraged depositors to remain calm. ‘Banks’ man-
agements were responsible for briefing branch managers so they could
help avoid customer panic, which would have led to uncontrolled de-
mand for dollars against Lebanese pounds. This proved successful’ (Stan-
dard & Poor’s, 2006).50 Third, the decision not to lend securities limited
short selling and CDS activity. On the day after Hariri’s death, despite the
great uncertainty, one international trader (interviewed 18 February 2005,
4 days after the assassination) saw only one CDS trade taking place in the
market.
Individual investors were also important. To replenish its foreign ex-
change reserves, the central bank in April 2005 issued a 10 year Certificate
of Deposit, a tradable security similar to a bond. This borrowing was
launched at a period of considerable uncertainty (although the worst ap-
peared past), but sold in substantial volumes to individual investors. This
contributed to an issue size of US$2 billion, equal to the fall in gross re-
serves, and more than the central bank expected.51 The reason was the high
return compared to the alternative of bank deposits. ‘[W]e had unbeliev-
able demand by [individual investors], because it’s paying . . . 10 percent
coupon, yield 10.5 . . . we had demand in 50, 60, 70 million dollars, prob-
ably, if not more [US$10–20 million would be expected]’.52 At the time,
bank deposits paid 3.5–4.5 percent.53 Critics claim the interest rate was
higher than necessary,54 but despite Lebanon being rated a low B3/B-, and
recently downgraded by Moody’s,55 the country was able to borrow US$2
billion at a time of economic and political uncertainty (albeit also some
optimism after the Syrian withdrawal) and at an acceptable interest rate.
157
This was thanks to unfinancialized individual investors. Brazilian bonds

yields in 2002 exceeded 25 per cent, and Turkish yields in 2001 exceeded
15 per cent (see Figure 2 above).
Turkey’s 2001 crisis

Turkey’s 2001 financial crisis saw severe weakness in currency and bond
markets (Akyüz and Boratav, 2005; Altunışık and Tür, 2005). Turkish banks
ordinarily lend government securities, but some stopped lending at this
time,56 in order to limit shorting. Six banks also decided to intervene di-
rectly in the foreign exchange market, forming a fund to buy Turkish lira in
the market, as a central bank would in supporting the currency.57 Their mo-
tivation came from their inability, unlike foreign investors, to fully exit: ‘we
. . . have [a] branch network and . . . lots of customers, meaning if Turkey
gets hit more, we as banks also get hit more . . . whereas for the foreign
banks present in Turkey it’s just a trading game’.58 This cooperation be-
tween the six banks was not the result of government pressure, regulatory
or otherwise.59 Interviewees disagreed on the success of this operation,
and other banks may have been acting differently,60 but a group of impor-
tant banks saw it as in their interests to support the market in the face of
foreign selling: ‘if you are in a small community, in certain cases . . . we get
together and say okay this is not for the bank, this is for Turkey’.61
Individual investors were also important in Turkey in 2001, and caught
even the domestic banks by surprise. There were fears regarding the gov-
ernment’s ability to raise financing, but individual investors were attracted
by the high interest rates, and ensured successful auctions.62 Individual in-
vestors bought when even domestic banks would not. The banks, initially
unwilling to finance the government, then followed their individual in-
vestors, confident of a successful auction. Individual investors ‘supported
the Treasury more than the banks did’.63 The very high real interest rates
involved in attracting individuals, 50–70 per cent, were unsustainable in
the medium term, but the success of these auctions helped avert an even
costlier crisis. As in Lebanon, unfinancialized individual investors were
central to the government’s ability to borrow.
Brazil in 1998–99 and 2002

The contrast with Brazil is marked. In 1999, after the Asian and Russian
crises, the government was forced to devalue a previously pegged currency
and turn to the IMF. The 2002 presidential elections saw even greater falls
in bond prices (see Figure 2). In contrast to Lebanon and Turkey, many
banks chose either to hedge their risk or to place bets on further price falls,
and in a financialized market were able to do so: ‘On the devaluation, 1999,
every bank was very long dollars and every bank made a lot of money.’
158
In 2002, ‘we were short the currency, hedging some exposures’.64 The
largest Brazilian banks remain ‘married to the country’,65 and could not
shield themselves entirely from the consequences of an economic collapse
caused by a government debt default. In 2002, a number of the larger banks
did buy when the market was weak, and profited as a result.66 Some banks
discussed trying to support the market, but the central bank, not believing
this was a solution, would not change the rules on marking positions
to market, which the banks believed was necessary.67 Nevertheless, the
Brazilian banks, themselves more financialized and operating in a more
financialized market, could either partially insulate themselves through
hedging, or actively exploit the market weakness to which their selling
contributed. Brazil was forced to turn to the IMF as private markets would
not provide financing at a far lower debt to GDP ratio than Turkey reached
in 2001 (see Figure 1), and Lebanon was able to continue borrowing with
even higher indebtedness.
Additional events
Other periods in both Lebanon and Turkey further demonstrate the impact
of bank and individual investors. Mauro et al. (2007) note the historical
importance of war in weakening bond markets, but Lebanon’s government
bond market did not suffer major weakness during the Israeli invasion that
started in July 2006 (Schimmelpfennig and Gardner, 2008; see also Figure
2). In Turkey, individual investors acted in a similar fashion during serious
market weakness in 1994 to the behaviour described above.68
A further example from 2003, when the Turkish parliament rejected the
United States’ request to use Turkey for the invasion of Iraq, is worth
quoting at length:
[Foreign investors] were . . . saying, they’re going to default in three
months . . . They’re all short . . . so here’s this big speculative attack
. . . But the guy on the street thinks . . . these are some pretty good
yields . . . They directly bought the auctions . . . [I]t also helped that
the government . . . rejected the troops and within that weekend
they passed the budget . . . and . . . you got this retail wall of money
. . . buying T-bills, they [the international investors with short posi-
tions] had no chance. So it reversed very quickly’.69
This is another example of a situation where a potential crisis did not
occur. Government policy decisions are important to these outcomes, but
also of central importance are the potential investors in government debt,
and their investment attitudes. The involvement of less-financialized do-
mestic banks and individuals as investors is a positive for the government’s
ability to raise financing and to avoid or manage financial crisis. Crisis is,
as a result, less likely and less severe.
159
CONCLUSION
This study demonstrates how the increased financialization of financial
market actors and government bond market structure can undermine debt
sustainability and increase debt intolerance by increasing borrowing costs
and the likelihood and severity of debt crises. This reduces governments’
capacity to increase expenditure. This concluding section addresses two
further questions, regarding the generalizability of these conclusions and
their implications, both for government policy and for the focus of aca-
demic research.
Any conclusions do not necessarily apply to developed world govern-
ment bond markets. The ‘safe haven’ status of developed world govern-
ment bonds can increase demand at time of uncertainty and distinguishes

developed from emerging markets. However, loyal investors may nev-
ertheless increase borrowing capacity, for example in Japan and explain
Greece’s much lower debt level. For other middle-income emerging coun-
tries, questions of generalizability must first recognize the limitations of
this study, covering only three countries over a limited period and em-
ploying a methodology that depends heavily on interview data. Further
research is needed, including quantitative studies of a broader range of
countries. Nevertheless, some observations are appropriate.
Schimmelpfennig and Gardner (2008: 28) conclude that ‘it is unlikely
that many countries could, or even should try to, replicate the Lebanese
experience’, but the country nevertheless shows that ‘building on special
circumstances to cultivate a dedicated investor . . . base helps insulate to
some degree financing flows from general market trends’. Broadly, this
study agrees with these conclusions, but its comparative nature suggests
greater generalizability. Lebanon is indeed unique, and it is difficult to
envisage any country being able to follow its example fully. Such high
government indebtedness also has potentially negative economic implica-
tions. Nevertheless, as the Turkish case further demonstrates, the impor-
tance of patient or loyal investors in government bonds to the avoidance of
debt crises and therefore sustainable government borrowing (and avoid-
ance of the heavy economic costs of crises) is a conclusion with policy
implications across emerging markets. At a minimum, it questions the
warnings against a captive market for government bonds (IMF, 2003: 23).
The size of Lebanon’s loyal investor base is the result of ‘special cir-
cumstances’, but the IMF (2006c) shows that investors with a potentially
positive impact on borrowing capacity (including pension funds and insur-
ance companies) owned over 70 per cent of the domestic debt of emerging
market countries surveyed in 2005. There is also significant domestic own-
ership of notionally international debt, mainly by banks. The average in
2004 was 11 percent, up from 5 per cent in two years. As demonstrated
above, central to these investors’ loyalty is their financialization. A full
160
understanding of borrowing capacity, therefore, requires a focus on this

financialization, in addition to the structure of financial markets.
For academic research, the main conclusion regarding understanding
the impact of financial globalization concerns the focus of enquiry. As
important as processes of internationalization are to IPE’s consideration of
change in financial markets, domestic financial actors cannot be ignored,
even when considering markets, such as foreign currency bonds, generally
labelled ‘international’. As important as regulation and liberalization are
to the study of both domestic and international financial markets, a focus
only on changing regulation is too narrow to analyse processes of change
in financial markets. This is arguably more significant for those concerned
by the consequences of such change than for those convinced by the virtues
of ever-expanding financial markets. In particular, while Maxfield’s (1998)
focus on different investor types expands the patient/impatient model of
financial market actors, analysis needs to go further, to focus on the internal
decision making of investors, the motivations for, and consequences of,
these decisions, as well as the detailed structure of financial markets.
ACKNOWLEDGEMENTS
The research on which this article is based was supported by a Postgrad-
uate Studentship from the UK Economic and Social Research Council.
I would like to acknowledge the helpful comments of Mark Aspinwall,
David Howarth, Donald Mackenzie and three anonymous reviewers.
NOTES
1 Financial year 2004–05. Singapore is anomalous, as it issues domestic debt to
develop the domestic market rather than for borrowing purposes, and invests
the proceeds abroad.
2 For Rajan, institutional change is the emergence of ‘new entities . . . such as
private equity firms and hedge funds’.
3 EMTA surveyed 66, mainly international firms. Five Brazilian institutions par-
ticipated, no Turkish and one Lebanese.
4 Interview with investment banker, London, 23 June 2006.
5 End September 2006. Source: Brazilian Treasury, <www.tesouro.fazenda.gov.
br/english/hp/public debt report.asp>, Table 7 (accessed 7 January 2007).
6 Thirty-nine interviews were conducted in London (January 2005–February
2006) and New York (all bar one in May 2006). All interviewees were involved
in the emerging bond market. In Brazil, 26 individuals were interviewed (São
Paulo, Brasilia and Rio de Janeiro, 29 August–12 September 2006). Twenty-one
interviews took place in Lebanon (Beirut, 2 September–12 September 2005,
and one interview in London, 21 October 2005) and in Turkey, 25 interviews
(Ankara and Istanbul, 30 November–11 December 2005).
7 October 2006. Source: Turkish Treasury. <www.hazine.gov.tr/english/
kaf/2006dibs eng.xls>, accessed 4 January 2007.
8 Senior official, Banque du Liban, interviewed 8 September 2005.
9 Department Head, Turkish Treasury, interviewed 2 December 2005.
161
10 Source: Turkish Treasury. <www.hazine.gov.tr/english/kaf/2006dibs eng.

xls>, accessed 4 January 2007.
11 End September 2006. Source: Brazilian Treasury. <www.tesouro.fazenda.gov.
br/english/hp/public debt report.asp>, Table 7, accessed 7 January 2007.
12 Interviewee estimates.
13 December 2006. Ownership figures from Turkish Treasury official, e mail com-
munication, 8 January 2007, based on BRSA figures. Outstanding debt at
end November. Source: Turkish Treasury. <www.treasury.gov.tr/>. Accessed
9 February 2007.
14 Interview with official, Brazilian Ministry of Finance, Brazilia, 6 September
2006.
15 Interviews with foreign banker, São Paulo, Brazil, 29 August 2006; foreign
banker, São Paulo, Brazil, 4 September 2006; former official, Banco Central do
Brazil, São Paulo, 29 August 2006; hedge fund manager, São Paulo, Brazil, 31
August 2006.
16 Interviews with foreign banker, São Paulo, Brazil, 29 August 2006; official,
BM&F, São Paulo, Brazil, 1 September 2006; foreign banker, São Paulo, Brazil,
29 August 2006.
17 Interview with foreign banker, São Paulo, Brazil, 29 August 2006.
18 Interview with Brazilian banker, São Paulo, 30 August 2006.
19 Interview with Turkish banker, Istanbul, 5 December 2005.
20 Interview with Lebanese banker, 8 September 2005.
23 Interviews with Turkish banker, Istanbul, 5 December 2005; Turkish banker,
Istanbul, 7 December 2005, also gave the $300 million figure; and ‘The local
banks cannot sell off everything and go flat or go short’ (Turkish banker,
Istanbul, 7 December 2005).
24 Interviews with Lebanese banker, 2 September 2005; Lebanese banker, 9
September 2005; Lebanese banker, 12 September 2005.
26 Interview with Lebanese banker, 3 September 2005. Also interviews with
Lebanese banker, 2 September 2005; and Lebanese banker, 12 September 2005.
29 Interviews with Lebanese banker, 8 September 2005; also Lebanese banker, 3
September 2005.
30 Interview with Brazilian proprietary trader, São Paulo, 29 August 2006.
31 Interview with Lebanese banker, 9 September 2005; ‘local retail clients . . . only
look how much they receive at the end of the maturity. So they don’t trade
much’ (Interview with foreign banker, Istanbul, Turkey, 7 December 2005).
32 ‘[R]etail . . . keep rolling their investments all the time’ (Interview with invest-
ment banker, London, 22 June 2005; previously worked at a Turkish bank).
33 Interview with investment banker, London, 5 January 2005.
34 ‘[T]his position that I’ve kept is three weeks old . . . that’s a long time . . . Nobody
buys and keeps things for six months, a year . . . things change’ (Interview with
hedge fund manager, London, 23 June 2005).
35 Interviews with banker, 50 per cent foreign-owned Turkish bank, Istanbul, 8
December 2005; also investment banker, London, 23 June 2005.
36 ‘[T]hey look at the relative spreads of the asset [to] liabilities, even though
. . . the cost of liabilities can increase, they tend to . . . sit on positive spread
trades’ (Interview with investment banker, London, 22 June 2005).
162
37 Banco Central do Brasil (2006: 34); Banking Regulation and Supervision Agency
(2006).
38 Interviews with investment banker, London, 18 February 2005); hedge fund
manager, London, 23 June 2005; ‘they’ll go short and . . . long and . . . play other
things’ (Interview with investment banker, London, 17 February 2005).
44 Interview with investment banker, London, 22 June 2005; previously worked
for a Turkish bank.
46 Banco Central do Brasil (2006: 34); Banking Regulation and Supervision Agency
(2006).
47 Banque du Liban, <www.bdl.gov.lb/edata/elements.asp?Table=t5231-10>
(accessed 14 October 2009).
48 Interview with Lebanese banker, 8 September 2005. Also (same interviewee):
‘[Y]ou bought dollars as banks, but you have to place them . . . with the Central
Bank . . . so you cannot take them out . . . it’s not they enforce them, but they
. . . encourage . . . really strongly by persuasion and everything, otherwise they
would have collapse[d] . . . and it worked’.
49 Gross international reserves minus principal and interest due within 12 months
on central bank foreign currency liabilities except to the Lebanese government.
50 Also interview with Lebanese banker, 9 September 2005.
51 Interview with Banque du Liban official, 8 September 2005.
52 Interview with Lebanese banker, 9 September 2005. Also interviews with
Lebanese banker, 8 September 2005; Banque du Liban official, 8 September
2005.
54 Interview with former minister, Lebanon, 6 September 2005.
55 On 24 March 2005 (www.moodys.com).
56 Interviews with Turkish banker, Istanbul, 8 December 2005; also Turkish
banker, 5 December 2005.
57 ‘[T]hat’s the kind of unity we had, locals against foreigners. Because foreign-
ers were talking about the devaluation, collapse and everything’ (Interview
with foreign banker, Istanbul, Turkey, 5 December 2005. In 2001 the intervie-
wee worked for a Turkish bank). Also interviews with banker, foreign-owned
Turkish bank, Istanbul, 8 December 2005. The bank was not foreign owned in
2001, and was one of the six banks; Turkish banker, Istanbul, 7 December 2005;
Turkish banker, 8 December 2005.
60 An anonymous reviewer suggests another large bank profited substantially at
this time, in a way similar to the Brazilian banks.
61 Interview with banker, 50 per cent foreign-owned bank, Istanbul, Turkey, 8
December 2005. The bank was not part foreign-owned in 2001.
62 Interview with Turkish Banker, Istanbul, 7 December 2005.
63 Interview with Turkish Banker, Istanbul, 7 December 2005.
65 Interview with former official, Banco Central do Brasil, Rio de Janeiro, 11
September 2006.
163
66 Interviews with hedge fund manager, Rio de Janeiro, Brazil, 12 September

2006; former official, Banco Central do Brasil, Rio de Janeiro, 11 September
2006.
67 Interview with former official, Banco Central do Brasil, Rio de Janeiro, 11
September 2006.
69 Interview with research analyst, London, 23 June 2005.
NOTES ON CONTRIBUTOR
Iain Hardie is a Lecturer in International Relations at the University of Edinburgh.
He studied history at Gonville and Caius College, Cambridge, before an 18 year
career in investment banking in London and Hong Kong. He completed his PhD at
Edinburgh in 2007, and started as a lecturer in September 2007. His main interest
is the politics of financial markets.
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On: 30 December 2014, At: 01:14

Review of International Political

How much can governments

To link to this article: http://dx.doi.org/10.1080/09692290903507276

PLEASE SCROLL DOWN FOR ARTICLE

INTERNATIONAL FINANCE AND TAX

countries in the ‘EMBI Global’, an index of emerging market bonds, the

(higher) the capacity of governments to borrow on a sustainable basis. In

CASE STUDY COUNTRIES

Brazil Lebanon Turkey

Sources: http://data.worldbank.org, www.standardandpoors.com, www.bcb.gov.br, IMF

possibly pre-empted. Turkey’s peak, in the 2001 financial crisis, also

Figure 2 EMBI country components US$ yields 1998–2007. Source: Bloomberg.

may undermine regulation. Financial innovation undermined Brazilian

in domestic actors and markets. In Brazil, domestic private banks had

WHO OWNS GOVERNMENT BONDS?

Table 2 Investor involvement in domestic bond markets

Lebanon Turkey Brazil

Domestic pension Not involved Low involvement High involvement

In Lebanon, over three-quarters of domestic and international govern-

Table 3 Investor involvement in international bond markets

Lebanon Turkey Brazil

40 per cent of international bonds. Domestic mutual and pension funds

DOMESTIC BANKS AND INDIVIDUAL INVESTORS

The range of alternative investments has an important influence on the

as buyers of short-term government securities, are buying bonds up to 30

cially in periods of market weakness, is also influenced by performance

DOMESTIC BANKS AND INDIVIDUAL INVESTORS IN CRISIS

the reactions of markets in the three countries to situations where shocks

including an IMF programme or, in Lebanon’s case, bilateral support,

foreign currency reserves. The risk-averse strategy, of placing the US dol-

This was thanks to unfinancialized individual investors. Brazilian bonds

Turkey’s 2001 crisis

Brazil in 1998–99 and 2002

ment bonds can increase demand at time of uncertainty and distinguishes

understanding of borrowing capacity, therefore, requires a focus on this

10 Source: Turkish Treasury. <www.hazine.gov.tr/english/kaf/2006dibs eng.

66 Interviews with hedge fund manager, Rio de Janeiro, Brazil, 12 September

Carvalho, B. S. de M. and Garcia, M. G. P. (2006) Ineffective Controls on Capital

Competition & Change, 12(2): 167–83.

Grabel, I. (1995) ‘Speculation-Led Economic Development: a Post-Keynesian Inter-

International Monetary Fund (2002a) Assessing Sustainability, <www.imf.org/

International Monetary Fund (2007b) IMF Concludes 2007 Article IV Consulta-

Krugman, P. (1997) Currency Crises, <http://web.mit.edu/krugman/www/crises.

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